Hidden cost putting Aussies in debt

 

Everyone likes to score a bargain, especially at Christmas time - and there are plenty of discounts being offered by retailers trying to make up sales after a tough retail year.

But finance experts warn that if you use a credit card to buy your Christmas presents, you might be kissing goodbye to any potential savings.

Finance educator Vanessa Stoykov said while it might be tempting to spend up for Christmas, especially after the tough year we've had, she warned about the extra cost of putting items on credit and the pitfall of falling back into debt this holiday season.

DON'T RELY ON CREDIT

"Putting presents on your credit card is the biggest mistake you can make," Ms Stoykov explained.

"Most people don't realise that, depending on how long it takes to pay it off, you could be paying up to 1.5 times what an item is worth if it's put on a credit card," she said.

"So next time you're deciding whether or not to buy a gift on your credit card, ask yourself if you're willing to spend that much extra on it."

Aussies have paid down billions of dollars in credit card debt this year. Picture: iStock
Aussies have paid down billions of dollars in credit card debt this year. Picture: iStock

Ms Stoykov suggests to "cut the credit card up" and think wisely about where you're spending your money.

"It's finally the festive season, and for many people that means spending a much more significant amount of money than usual, especially to get over those COVID blues and to create some new memories," she said.

"But if it is one thing life has taught us this year, it really is the people you are with that matters, far more than the gifts."

PLAN AHEAD TO SPEND LESS

The sooner you start planning for Christmas, the better, Ms Stoykov advised.

"If you do one grocery trip to buy all of your festive foods, you are definitely going to blow your budget. Instead, buy one or two of the non-perishable items per shop for the weeks leading up to Christmas," she said.

"This not only allows you to capitalise on weekly sales, but it also means it's less of a financial blow when you buy the fresh produce."

Finance experts warn to not rely on using credit cards to pay for Christmas presents. Picture: Dan Peled/AAP
Finance experts warn to not rely on using credit cards to pay for Christmas presents. Picture: Dan Peled/AAP

She reminded shoppers to not get carried away. "It's easy to spend money on gifts, but the truth is, ultimately, it's the thought that counts the most," Ms Stoykov said.

"Instead of buying a loved one a new piece of clothing that they may or may not like, consider getting a special frame and pairing it with a photo of the two of you together. Not only will it likely be cheaper, but it's also almost guaranteed to make the recipient smile for years to come."

Experts warn to think before you spend and to avoid credit card debt. Picture: David Crosling/AAP
Experts warn to think before you spend and to avoid credit card debt. Picture: David Crosling/AAP

SPLURGE WISELY

Think about the kind of Christmas you want and spend your money wisely on that, while giving up the less important things.

"Be focused on the festive season experience you want and spend in line with that," she said.

"For example, if you and your family enjoy celebrating over long lunches, splurge on quality foods - or if you all love presents, allocate a higher percentage of your budget on purchasing memorable gifts. Make sure the dollars you spend are done intentionally.

"Ultimately the holiday season is meant to be fun, and a great time to reconnect with family and friends, so make sure you make the smartest money choices today, so you don't need to worry about debt tomorrow."

Ms Stoykov believes cutting up the credit card is not a bad idea. Picture: News Corp Australia
Ms Stoykov believes cutting up the credit card is not a bad idea. Picture: News Corp Australia

DON'T COME UNSTUCK

The warning to be careful about credit card spending comes as the Reserve Bank revealed Aussies have slashed more than $8 billion in personal and business credit card debt in Australia this year.

This includes $7.68 billion off personal credit card debt, which has been declining for nine consecutive months since the beginning of the year, while businesses have cut $401.7 million from credit card debt since January.

But the headway made to pay down credit card debt could come undone if we reach for the credit card this Christmas.

Canstar finance expert Steve Mickenbecker agreed that avoiding credit card debt leading into Christmas was the best foot forward into 2021.

"As tempting as it might be to splash out to make Christmas feel extra special this year, don't come unstuck before the year's end by stacking on credit card debt," Mr Mickenbecker said.

"This year has been a breakthrough for many credit card holders with credit card debt declining rapidly. A new frugality has taken hold and if carried into the new year, we could see a sustained decline in credit card debt."

Buy now, pay later has gone up to 18% this year compared to 10% last year. Picture. Julian Smith/AAP
Buy now, pay later has gone up to 18% this year compared to 10% last year. Picture. Julian Smith/AAP

AVOID BUY NOW, PAY LATER

The latest Canstar consumer pulse report found the number of people with debt in a buy now, pay later service has increased to 18 per cent this year, up from 10 per cent in 2019.

"While further cuts to credit card debt look promising, it will be important to ensure credit card debt isn't transferred to other forms of debt such as buy now, pay later services," Mr Mickenbecker said.

"One of the learnings has been that the sustainability of our lifestyle matters more than the number of things money can buy. Hopefully this financial habit will endure well beyond COVID-19," he added.

Originally published as Hidden cost putting Aussies in debt


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